Best Buy Explains its Grim Quarter: ‘We Were Out-Competed’

Best Buy rattled investors and sent its shares plunging 28% Thursday when it said its sales over the holiday season shrank in the U.S.

Chief Executive Hubert Joly and Chief Financial Officer Sharon McCollam discussed the results on a conference call with analysts that addressed the trouble with discounts, cost cutting plans and shortages of certain high-end phones and tablets (“I think you can probably guess what these products are.”)

Some highlights:

On discounts
Prices were cut to preserve market share, but the bad news is they didn’t help boost demand. “The aggressive promotional activity in the retail industry during the holiday period,” Mr. Joly said, “did not result in higher industry demand and had of course a deflationary impact on our revenue.” So will retailers get more rational and knock it off? “The promotional environment could subside,” he said. “But of course we’ll have to see how this plays out.”

On cost cuts
Best Buy has been targeting $725 million of cost cuts, and said today it’s achieved $550 million. But amid continued margin pressure, the company is poised to go much deeper, following similar moves by Macy’s and Penney. Best Buy “can see a much-bigger number,” Ms. McCollam said, though it’s not ready to release a new target. “We need to be very frugal and lean,” Mr. Joly said. “One of my middle names is frugality.”

On the turnaround
While December didn’t pan out as Best Buy executives anticipated, and while investors are rattled, executives stressed that December is just one month, however important, and doesn’t mean the company is on the wrong course. “This management team is not shaken by this bump,” Mr. Joly said. “The opportunities have not changed.”

On competition from online
Online accounted for 11.5% of the company’s combined November/December revenue, up from 9% a year earlier, Ms. McCollam said. “Online is a big opportunity, and that’s helped by ship-from-store,” she said. But Best Buy has work to do. The CFO said the company continues to build up its database so it can make the sort of personalized recommendations seen on Amazon.com and get away from blast emails. “We were out-competed from an online marketing standpoint because of our systems’ capabilities related to personalization,” she said. “Next year, we’re going to be in a much-better position to compete.”

On smartphones and tablets
The executives said it was a “disappointing” holiday for mobile. Part of the problem, Ms. McCollam said: “There was not as much newness.” But supply problems played a role, with “significant shortages,” Mr. Joly said, particularly at the high end. “There was one or two models that were in high demand and in relatively short supply,” Mr. Joly said. He seemed to point at Apple and Samsung. “I think you can probably guess what these products are,” he said. “Hopefully with my comments here, you can guess without me saying exact words.”

Comments (5 of 7)

I brought my computer to be fixed at Best Buy. The installed a new hard drive. Within one moth it failed. When I returned it they wanted to scan my NJ license.Saying I was returning the hard drive that failed.I said I am returning a repair. I said I will show you my license but you can not scan my license. They said we will not fix the computer or refund your money for the bad repair without them scanning my license. So I was forced to give them my NJ license to be scanned into their computer. NOR WOULD THEY EXCEPT MY MILITARY ID.
I, MY FAMILY AND MY FRIENDS WILL NO LONGER SHOP AT BEST BUY UNTIL THIS POLICY IS CHANGED. WE ARE PROUD FREEDOM LOVING AMERICANS AMERICANS !!! HEY BEST BUY AMAZON DOESN'T WANT MY LICENSE and now has all my business as well as my friends!!!

1:36 pm January 20, 2014

Joe wrote:

Best Buy's e-commerce operation is antiquated. Without an effectively communicating real time inventory solution, they will not get my business. I realize that I'm not their core customer, but I have used exclusively BB in the past for my electronics purchases. When ordering an applinace online for home delivery, I was notified the Saturday before the Monday delivery that the item was backordered. I learned that the warehouse has access to the true inventory position 24 hours before the ship date. This is a business challenge circa 2001-02.

4:18 pm January 17, 2014

John wrote:

*Jim- Best Buy has carried Vizio for over a year now so your argument is flawed. And Changhong would be a terrible match for a brick and mortar retailer that sells mainly to the U.S.
Its hard to knock Best Buy accurately if you haven't been into one in over a year.

12:07 pm January 17, 2014

Jim wrote:

Best Buy has fundemental problems in competiting, yet they continue to be arragont and dismiss these facts. Case in point; Vizio and Changhong. BBY, assorts their Branded TV based on Consumer Demand (ie Samsung, Sony, Panasonic etc.), yet despite the fact Vizio is the #2 market share Brand (which consumers want) they have refused for nearly a Decade to assort Vizio in their stores, rather arguing they are protecting their private label products; Insignia & Dynex. A huge miss. Secondly, they are using the same argument for one of the Worlds top OEM manufacturers; Changhong, and has refused to entertain a meeting or discussion with Changhong, however guess who has recognized their value proposition in the marketplace; yep you can find the Brand on Amazon.com

3:00 pm January 16, 2014

Dan wrote:

I knew I should have shorted BBY. Amazon can cut their margins to the bone and WS doesn't care. BBY is expected to have a normal PE. How can they compete with Amazon on price, have the overhead of brick and mortar, and have a normal 10 PE, as opposed to Amazon's >100?